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The Basics of Inflation

There is a lot of talk of inflation in theshortening demand and lowering prices on
economic  news  lately.  What  does  it mean?items.
Most of us understand the basic idea ofFor the most part, steady inflation is not
inflation -- things cost more than they usedseen on a day-to-day basis. You usually only
to. In fact, that is pretty close to thesee it when you look back. I remember that 85
Webster's definition. It is when prices gocent gasoline in high school. But you made a
up. For example, I remember when I could putlot  less  in  your  job  as  well.
five dollars of gas in my little truck and
drive for a week. Nowdays, five dollars getsWhy is inflation important to the individual?
me  less  than  two  gallons  of  diesel.Well, when you are planning for the long
term,  it  can  hurt  you  a  bit.
Inflation  is  at  work.
If you are 30 year old, you are around 30
Inflation has been pretty steady. Just a niceyears from retirement. You plan to retire at
climb. In general, inflation has remained at60 with a million dollars. That sounds like a
an average of 3% for the past 30 years. Welot  of  money.
aren't doing that bad -- some countries have
inflation  above  1000%  in  one  year.It  may  not  be.
Yes, sometimes it jumps, like in the 70's.Factor in 3% inflation for 30 years and your
But  in  general,  we  are  doing  well.million dollars will only buy you around
$400,000 worth of goods and services. If you
Okay,  what  causes  inflation?live 20 years after retirement, that's only
$20,000  a  year  to  live  on.
Inflation can be caused by many factors.
Increases in taxes and government fees canSixty percent of your money has gone to
lead to inflation. Things that costinflation. Can you live on that? You will
businesses especially cause inflation. Whenneed to save approximately $1.8 million and
the cost of a business goes up, the productinvest it at 5% after retirement in order to
prices go up. When prices go up on productshave the same amount of spending money as you
and services, your income goes down (you aredo  now.
spending more of it). You have to work harder
and longer to afford the same things. Or hopeSo remember, inflation does really affect
that  you  get  a  cost of living adjustment.you. You should consider it when planning for
the future. Other than that, there isn't much
Which causes the business costs to go up andyou  can  do.  But  you  must  factor  it in.
it  all  starts  over  again.
A quick way to factor in inflation is to
Inflation also occurs when your personalsubtract the 3% inflation rate from your
taxes, property taxes and sales taxesassumed rate of return. For example, if you
increase. You ask for an increase in yourexpect a 13% return on your investment,
wages.  Then  business costs go up and so on.inflation takes it down to a 10% rate of
return. This will give you a picture of the
When things become rare, inflation can occur.value  of  your  investment.
The more demand on an item, the more
expensive it becomes. For example, if thereThere are investments out there than benefit
is a drought and wheat does poorly, the pricefrom inflation, such as real estate and
of wheat goes up. This may cause the price ofprecious metals. Look into diversifying your
wheat  products  to  go  up.portfolio into different types of assets, not
just  different  types  of  stocks.
If interest rates increase, inflation can
also occur. The cost to borrow money goes upInflation is simply a fact of life. By
for businesses, increasing their cost and soaccounting for it, you are prepared to fight
on. However, higher interest rates alsoit in the future.
encourage people to save more and spend less,



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